OPEC says oil market ‘over-supplied’

This morning, the blog is awarding itself a pat on the back. This is because, almost alone, it forecast in mid-July that oil prices ‘could easily fall $50/bbl to $100/bbl’ in the absence of any military action on Iran. And it had the courage to repeat this comment on 4 August.

It added that if prices ‘fall back, then working capital (stocks etc) will take a massive hit’. This forecast also seems to have come true. The whole supply chain appears to be filled with product, bought on the basis of a consensus forecast of $200/bbl oil by Xmas. This surplus may well take weeks, if not months, to clear properly.

The only ‘relief’ would be if oil prices suddenly rose again. But whilst OPEC agreed yesterday that the market was ‘over-supplied’, they formally agreed just a minor cut of 520kbd, effectively re-establishing the ‘official’ quotas. If OPEC had cut further, they would have risked a real shortage in Q4, as stocks now need to build in front of the northern winter.

Another major blog forecast has been that 2007-8 was shaping up to be a repeat of 1979-80. It first stated this view last October. It worried that, as in 1979, the consumer would initially appear to absorb a major rise in oil prices. Then, as in 1980, it would become apparent that this had been ‘the catalyst that finally causes the US consumer to cut back’.

US and Chinese stock markets were making record highs when this forecast was first made. But the blog worried that ‘the continuing problems in the banking sector may well turn off the tap of consumer, and maybe even corporate, lending’. Nearly a year later, stock markets are well off their highs, and the latest news from the financial sector indicates that the blog’s concern may prove well-founded.

About Paul Hodges

Paul Hodges is Chairman of International eChem, trusted commercial advisers to the global chemical industry. He also serves as a Global Expert for the World Economic Forum. The aim of this blog is to share ideas about the influences that may shape the chemical industry and the global economy over the next 12 – 18 months. It looks behind today’s headlines, to understand what may happen next in critical areas such as oil prices, China and Emerging Markets, currencies, autos, housing, economic growth and the environment. Please do join me and share your thoughts. Between us, we will hopefully develop useful insights into the key factors that will drive the industry's future performance.

One Response to OPEC says oil market ‘over-supplied’

No, seriously, though, congratulations for forecasting the big picture so accurately amidst the morass of false predictions and the mountain of contradictory information.

It takes genuine insight and intelligence to connect the dots and make everyone who hadn’t thought about before it think “My goodness, wasn’t that obvious”.

I had thought that emerging market demand growth would more than wipe out any energy-consumption savings in the West. When you look at the stats, though, a lot of this emerging market demand is in fact only “potential”. Wake up and read the numbers – they are all freely available, both good and bad ones!

Are we going to see some fundamental changes in the US – e.g. extending the CAFE regulations to SUVs and providing incentives for the US automakers to try and catch up with the Japanese on fuel efficiency? (there’s certainly a strong local economic motive here).

Or maybe the lower oil prices will create the impression that the American way of life can continue unchanged.

The long-term reality, as we all should know, is different.

Sarah Palin’s supporters chanted “drill baby, drill”.

Sadly, it’s unlikely that any political audience would ever chant “tax baby, tax” – but this, along with incentives to conserve, is what is needed.

If this doesn’t happen, we will be consigned to extreme crude-oil pricing volatility in the long term – making a running a chemicals business very, very difficult.

Major geopolitical events aside, the false dawn of lower oil prices could well, as I said, lead to a resurgence of western consumption – and to more of the emerging market potential being realised. There is simply not enough oil to go around.

As for other hydrocarbons, gas pricing is intrinsically tied to crude – although the supply potential is greater.

Coal is an environmental rather than a supply issue.

Assuming CCS and other clean-coal technologies work, replacing oil-based transportation fuels to a sufficient percentage to substantially relieve the supply crunch would require a huge technical and investment effort.

And as for renewables, well, at least ExxonMobil is right on something: They are never likely to account for anything more than a small percentage of the total energy mix – without a massive political shift (probably made impossible by the “drill baby, drill” crowd).

The oil companies themselves need to also walk the talk. More top executives have to say what would have been unthinkable a couple of decades: Consume less of our products!

And when I say the oil companies, this needs to not just be the IOCs who are always picked out as having to take the lead (just as the US is on climate change).

But how on earth do you persuade the NOCs to conserve when there are so many socio-economic and political pressures to the contrary – not to mention individual career incentives to keep raking in the cash?

All rather depressing. See you on the other side of the black hole in a parallel universe, maybe, where oil endlessly reproduces itself and excess CO2 and other greenhouse gases are constantly sucked to the polar ice caps and are harmlessly vented into space, regulating the climate to perfection. Perhaps this is the real aim of the Large Hadron Collider, but the scientists haven’t told us to avoid unnecessary panic. Remember, “DON’T PANIC!”

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Paul Hodges is Chairman of International eChem, trusted commercial advisers to the global chemical industry.

The aim of this blog is to share ideas about the influences that may shape the chemical industry over the next 12 – 18 months. It will try to look behind today’s headlines, to understand what may happen next in important issues such as oil prices, economic growth and the environment. We may also have some fun, investigating a few of the more offbeat events that take place from time to time. Please do join me and share your thoughts.

Between us, we will hopefully develop useful insights into the key factors that will drive the industry's future performance.